It was a sharp comment from an OFW who was pitted against an astute businessman and founder of a Philippine conglomerate during a talk show. The OFW said, “The difference between us, sir, is that your dollars go out the country, but our dollars go inside the country.”
That statement rates high on audience impact. However, it does little to recognize the realities of the One ASEAN market and how globalization should not be an inbound one-way street. If we ask and encourage foreign companies to invest and do business here, there should be nothing that should be vilified about our Philippine companies investing and doing business there.
Going regional or global is about a local company getting bigger, true. But the promotion of the country as a brand along with that expansion is also true. Our trust for products made in the US, Germany, or Japan was built because of very specific products that we have been exposed to, whether they be jeans, equipment, or appliances. The presence of the companies that make these products in our country completes that trust and provides an inherent promotion of the rest of the products in those countries. (Even if the products are labelled “Made in China,” trust is preserved if the customer knows these are manufactured under license from those multinational companies.)
Experience and formal studies, including a recent one from the Asian Development Bank (ADB), recognize that being part of a global value chain is good for the country. From our own experience on the impact of inbound products and inbound investments, we learned that in building trust, it is very helpful to have presence in foreign markets. If that presence is good or strong, it inherently promotes brand Philippines and open doors.
I spent some time already to describe the big picture because it is essential to understand why I will say that our taxation system does not favor, or even discourages being a Philippine multinational. Dividends from foreign companies are subject to 30 percent tax (the maximum rate, without deductions), while dividends from domestic companies are exempt from dividend tax. Also, royalties (for use of name, trademark, or patents) received from outside the country are also subject to the maximum 30 percent tax on gross amount, compared to domestic royalty income taxed only at 20 percent.
So once the money goes out, it is very costly to bring profits back in. When licenses are given out, through franchises of a popular local brand for instance, it is so costly to earn that income if the license comes from the Philippines.
It makes sense therefore for Philippine multinationals, whether they be in food, clothing, pharmaceutical products, or services, to set up holding companies or to hold their intellectual properties in foreign jurisdictions where there are sufficient protection and less burdensome taxes. Anyway, the money they make will be reinvested in ventures outside the Philippines. There is nothing illegal or wrong about structuring companies to be globally competitive. But if the government wants the money they make outside to naturally come back in, the tax must not be very burdensome.
For example, for foreign dividends, a straight final tax of 10 percent can be considered, and for foreign royalties, a final tax of 20 percent similar to domestic rates can be imposed. The government will not lose money on income that previously don’t come back to the Philippines anyway. Revising this less noticed part of the Tax Code as part of Package 2 of the Tax Reform for Acceleration and Inclusion law (TRAIN 2) will deliver more funds to the country.
I need to make way for a couple of comments from our readers of our previous article “Temper the TRAIN fare.” A medical practitioner and hospital owner who does not want to be named says that hospitals and doctors already contribute so much by way of free beds, uncollected medical bills from poor patients, and uncollected bills from PhilHealth. Tripling the income tax rate of hospitals would be unconscionable and will impact on the viability of operating a hospital.
A stalwart from the academe, hailing from one of the top private schools in the country said, in relation to tripling the tax on schools, that he “doubts very much if government agencies offering scholarships would be able to take on more scholars to be funded,” and suggested that “it may be simpler to close down state universities and colleges which don’t perform by CHED standards. That should provide the government with funds it may need for whatever supposedly worthwhile government projects.”
Lastly, may I beg your indulgence for this sudden but important detour. For all the mothers who care to read my column, I have a message for you. If you think nothing equals a mother’s love, you are right. But feel assured of the love that comes back from your children, both expressed and unexpressed. It lasts only a lifetime, but thanks to you, we learned to pass that on to keep it alive. Happy Mother’s Day to our dearest mothers, on Earth and those in heaven!
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Alexander B. Cabrera is the chairman and senior partner of Isla Lipana & Co./PwC Philippines. He is the chairman of the Tax Committee, and the vice chairman of EMERGE (Educated Marginalized Entrepreneurs Resource Generation) program, of the Management Association of the Philippines (MAP). Email your comments and questions to aseasyasABC@ph.pwc.com. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.